Many Americans will begin receiving a few extra dollars in their paychecks this month. Thanks to the latest round of economic stimulus from the federal government, the monthly take-home pay of most workers will increase by about $50. Economists and politicians hope that this is enough to prompt recipients to spend. They want us to buy our way out of this recession.

The government tried something similar last year. But in 2008, the stimulus payments were issued as lump sums. Last year’s stimulus didn’t have the intended effect; large chunks of the population used the money to build savings or to pay down debt.

This time, however, you won’t be getting a check in the mail; the government has elected to simply reduce withholding taxes on our paychecks. The last round of stimulus checks cost millions of taxpayer dollars in postage and printing costs. (First with a letter telling us the checks were coming — then with the actual check!) At least they haven’t done that again.

That’s an obvious reason we won’t be getting a check. But there’s something much more subtle going on that I want to make you aware of.

The marginal propensity to consumeMarginal propensity to consume (MPC) is a fancy economic measure that shows how much more you’re likely to spend when your income goes up. If the United States’ average MPC is 90%, then for every extra dollar you earn (or are given) as an average American, you are likely to spend 90 cents of it as disposable income. And if you’ve paid any attention to our national savings rate recently, you might come to the conclusion that as a society we’ve been dancing right on the 99% MPC line. (That is, we spend 99% of every extra dollar we bring home.)

Whether or not it’s the intention of the government, they’re utilizing marginal propensity to consume with this tax/stimulus decision. Stretching out your stimulus “check” over nine months increases the likelihood that you will:

not notice the difference in your check, and

spend that difference — and in doing so stimulate the economy.

This was the problem with the stimulus checks we received in 2008. We were handed checks for $600 or $1200, no questions asked. But the checks landed in our hands right as we were starting to worry about the economy, our jobs, the housing market, the value of the dollar — and the end of the world!

With a one-time lump-sum payment, many Americans chose to pay down debt or t0 stick the money straight into a savings account. The end result? Very little economic stimulus. And that makes sense. This time, though, our leaders are sneaking that stimulus into each of our paychecks. Piece by piece, it will land in our checking accounts. The hope is that we’ll also spend the money piece by piece, boosting the economy.

Will you spend your stimulus?
The economy is in worse shape than it was twelve months ago, and I wonder if that will make a difference. Last year many people sensed the storm on the horizon, so they saved. This year the thunder is rolling and the rain falling all around. Will these small, incremental payments make a difference?

No matter whether you intentionally plan to spend the government’s money, or if you plan to apply it toward your saving/debt goals, you need to track where it comes from. This is the beauty of budgeting.

If you know your income is supposed to be $2,500 per month after taxes, you should be living off of that amount — or less. You should be tracking that money as it comes in. With an extra $50 per month, why not create a saving category specifically for this money? For example, you might:

Set up an automatic draft from your checking account to put the money in a savings account.

Change your direct deposit so that $50 per month goes into an account automatically.

Do what works for you. Just don’t let the money come in and out of your pocket without knowing where it goes. It might stimulate the economy if you did spend it, but remember that your personal economy matters most.

J.D.’s footnote: Will you consciously do something to stimulate the economy? Why or why not? The last time I asked, most of you said, “No way! I’m saving!” But have things changed in the past few months? What’s your take?

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I understand the goal of the stimulus funds, and also that it could be viewed as un-patriotic to save it. I was wondering if by investing those extra funds via index funds you could accomplish both goals (saving and stimulating the economy)?

We purchased a new house a week ago and since then put about 10K into the economy.. Some was local (gutters deck and a drive way done by local pros), others was not so local (supplies for the above mentioned, new furniture, a big screen TV…)

So we are stimulating the economy.. But we are also doing that from cash that was saved up for that specific reason (we also paid about 5K off our debt as well). And we needed/wanted those things and COULD AFFORD THEM. We didn’t buy them just to stimulate the economy (because let’s face it, unless my name is Warren Buffet, I don’t have enough cash to stimulate the economy on my own).

I think that people should spend their money and buy things that they need and like (if everyone stops spending, we will just keep spiraling down)..

One minor adjustment to the way we (as a nation) used to buy things in the past – we need to be able to pay for things we are buying. If you can’t pay for it, you don’t deserve it! (and putting it on credit does not count)!
DP

I’m not necessarily trying to stimulate the economy, but nor am I particularly saving more/spending less than I was before. That being said, my husband and I save a kind of ridiculous percentage of our income–20% or more. But we’re thinking of buying new couches–our dogs have destroyed our current ones, and there are good deals to be had. We are also taking advantage of travel deals, but mostly abroad…so we’re stimulating the global economy with those, but not so much the US economy. We spent last year’s stimulus checks on a trip to Europe.

This stimulus started during a crummy two financial months for me. So, yes, I guess I am spending it. Last month’s went to the mechanic and this month’s and next month’s will be going to the dentist. But, after that, I’m afraid it’s straight into savings to make up for my two crummy months.

I’m taking every bit of extra money and putting it in savings. But I’m in kind of an odd situation.

I just came across this site a few weeks ago, and I can’t stop reading it. J.D., your personal stories about your steps to finance enlightenment have been particularly inspiring.

I moved across the country at the beginning of the year for a job that brings me closer to family and where my husband and I have always planned to “end up.” Unfortunately, we haven’t found work for my husband, and he’s not willing to leave his current good job for any old job here–and I’m not willing to ask him to do that.

But my move at least inspired us to get to work on a big chunk of credit card debt that we had been paying down and then building back up for the past decade or so. We got a home equity loan to pay most of the total, then paid off the rest within two months. No more cc debt, just a loan payment that we plan to pay off early.

Since I’ve moved, I’ve been socking away as much money as possible, trying to build up enough money for him to make the jump out here with a bit of a cushion, if necessary. I guess I imagined there was some “magic number” that, once we reached it, we could say what the heck and have him come. But now I don’t know if that number exists.

Maybe if he doesn’t find anything, I just give up out here and go back to where we already have a house, and we’re way better off financially because of what we’ve done with paying down debt and building savings.

I really don’t know right now. I have a “deadline” of the end of summer to figure it out (although every day I spend apart from him really and truly sucks). I want this move to work out for both of us–this really is where I would like to be long-term–but I’m filled with self-doubt and worried that I’ve got the timing wrong.

But on a positive note: Thanks to reading this site, I was finally inspired to make a move with the money I’ve just been socking away in our super-low-interest savings account. Today I’ve set up a CD ladder (6-month intervals up to 24 months) with part of the money, and I’m moving more into a higher yield savings account (all with GMAC Bank). I think it’s a good balance of keeping some money available while having it actually start working a little more for us.

I’ll be spending the extra money, it just won’t be right now. I am putting whatever I can into savings for a wedding (someday), a house and a car. This extra stimulus will just help me reach those goals sooner. Also, since I am earning interest with the money (though very little), I am providing the government with more tax dollars, wahoo! As for last year’s stimulus check… it’s gone. I dumped it directly into the stock market… so I stimulated those who were shorting the market! Just trying to do my part to spread the wealth around…

Sir John Templeton, one of the greatest investors of the twentieth century, was a great advocate of thrift. However, given our current economic crisis, this concept of whether to spend or not to spend our money (including our extra stimulus dollars) should be examined in great detail by those who best understand the economy.

Next week, an event at The King’s College in New York will discuss the “Paradox of Thrift,” a term coined by John Maynard Keynes. This panel will review the concept of whether or not a revival of restrained consumerism is the only way to fix an ailing economy.

Prior to this current stimulus hitting my paycheck, I based my budget on a number slightly lower than what I usually received, by about $7/week. I did this because over the course of the year, the amount withheld would shift, and by using the lower number, I avoided having a budgeting shortfall.

I’m still creating my budget based on the lower number. I haven’t decided what I’ll do with the money over time, although I do like to have some money on hand to take care of unexpected expenses.

I started getting the higher amount last month. I save 10% of what I take home, so that bumped up just a bit. However, the rest is allocated to monthly expenses, which does give me a bit more wiggle room.

If you didn’t have any debt to put the extra money towards, maybe a money market account or a CD is the way to go with the extra fifty? I know the bank I use has an account that will let you put money into it and when it hits a point that you set it will automatically purchase a CD for you. If I recall it even gives decent interest while the money is sitting there waiting for you to build up enough, but I would need to check that and see.

Just formulated a budget. Going to save 20% of my income (pretax for 401k, after tax for roth). About 55% is going for all my bills. The rest will be saved in an account and spent whenever I’d like without guilt. It’s kind of the Balanced Money Formula

In the early fall I was planning to renovate my kitchen using cash I’d saved. As the economic news got worse I decided to wait and see how things played out.

Since then, the economic news has gotten a little better. Additionally, both my husband and I got news that strengthened our belief that our jobs are relatively secure. I’m now ready to actively start the kitche project. Upside? I’ve also saved another $5000 in the interim!

@No Debt Plan:
Referring to it as “the government’s money” is inaccurate at best. Matthew has it right — this stimulus is simply the government not taking from certain taxpayers quite as much as it used to. Calling it “the government’s money” puts people in a much different frame of mind because (1) it sounds like we’re getting a bonus/gift, instead of simply having less seized in the first place, so it seems more expendable (as in, “it’s not really mine, so I might as well use it”), and (2) it completely fails to recognize that it’s the people’s hard work that produces that capital. Be wary of the government seizing your hard-earned dollars!

I doubt this even affects me — the one last year didn’t, and I never got a stimulus check.

I will never spend money for the sole purpose of stimulating the economy. The basic premise of the economy is this: The more work we do, the more we can consume. The more we consume, the more work we allow others to do (to create the things that we consume). The more work that others do, the more that they can consume. Etc.

I’d rather the economy find a way to give people more leisure time while encouraging less consumption. It could be done, but it’d require a large shift in expectations among both workers and employers. Regardless of the feasibility of that ideal, I feel no obligation to help support the status quo.

I just opened an emergency savings account with my tax refund; this extra money, plus a bit more, will likely go there. So no new spending, but more $ available for my bank to lend and more tax $ on the interest I earn.
Win-win, I think. :)

@No Debt Plan: Matthew is not splitting hairs, it’s a an important difference. It is not the government’s money, the government did nothing to earn it. It is your money taken from you by force.

Also, it is not the same thing if the government takes more and gives it back later than if they take less. The first is called a FREE LOAN. I don’t know about you, but I’d rather be making interest on that money than just handing it over to the government so they can gift back to me what was mine in the first place.

Yes, the government did not generate the money. The government taxed us and took that money from us.

I’m not saying it is necessarily a gift, but in a way it kind of is.

The law that is on the books currently, the law of the land you live in, says X dollars of tax are taken out for every Y dollar you earn. The fact that they are taking out less doesn’t make it any less of a law that is currently in place.

Do I agree with the law? No.

But to say that it isn’t the government’s money — which technically, if you paid 100% of the tax you are supposed to pay it would be, is a bit of a stretch for me.

We can complain about the taxes all that we want, but it is the current law. Right? The government should be taking X dollars of tax out every month, but now they are taking out X minus $50 or so.

Enjoying the discussion. :)

@Regina: See the above.

If people don’t like the tax code here, they are free to A.) get elected into office and change it themselves, B.) tell their representatives to change the tax code, or C.) leave the country.

I don’t like 25-30% of my money disappearing to causes I don’t believe in. But there isn’t much I plan to do about it. It’s the law. The law. So you abide by the law or you face the consequences.

I think that we’ll probably end up spending at least some of it, hopefully on local foods as the spring season begins. As long as the money goes towards quality items, I don’t have a problem using it rather than saving it. Which of course isn’t to say that I would spend just to spend.

i don’t get it. even if you save or you pay off debt, you are stimulating the economy, so the last round did have an affect.

we haven’t been doing anything differently during this economic situation. well, maybe we have. i think we have been spending a little more because of some of the deals out there. we have definitely spend some money the past 6 months from new living room furniture, to a new bed, to a new computer, to a new watch, to new clothes, etc. all of it has been within our budgeting goals, though, so nothing out of the ordinary. we won’t notice the stimulus this time around, although my wife has planned to buy shoes, not knowing that her paycheck will be a little larger. we are also going to stimulate the european economy by going there next month.

Be careful with those withholding table changes. Just because less is coming out doesn’t mean the taxes due at the end of the year are less. I had to increase my withholdings to offset the table adjustments so I don’t end up owing next year.

Well, we have our first baby on the way, so I think any extra we get will go to getting the baby stuff we need. We’ll look for bargains and hand-me-downs but some stuff we definitely will get new, like the car seats.

If consumer spending rebounds and “saves” the economy, I will be disappointed. Why?

Simple: The chickens are coming home to roost. We as a nation have been living for the now, spending beyond our means, and chasing the hollow promise that owning just one more thing will make us happy.

If the recession reverses on a wave of consumerism, that won’t fix the gargantuan trade deficit that is slowly ruining our currency and national credit.

We as a country need to dig deep and undergo the painful process of realizing that basing everything around useless consumer goods is a BAD IDEA. We should instead invest in our country (infrastructure, services) and our people (health care, education) so that we can start producing something of VALUE for all humanity. The world doesn’t need a shinier ipod; it needs real solutions to real problems. If the entire world consumed resources at the rate of the US, we would need four Earths to sustain it.

With a conscious shift in effort and resources, we can experience a global renaissance of solutions and productivity.

I plan to donate at least some of it to animal shelters and other nonprofits, which are in dire straits right now. This is not really stimulating the economy, but helping to cushion the effects of the meltdown. My income will definitely be down this year, but thanks to years of diligent savings and getting used to living below my means, I’ll be okay.

Harley Pebley has it right; it’s the WITHHOLDING that is being changed, not the amount due next April. All of this ‘extra’ money that we’re currently seeing in our paychecks is going to have to go right back to the government next tax year. The IRS website (irs.gov) has a wonderful Witholding Calculator (link: http://www.irs.gov/individuals/article/0,,id=96196,00.html) that will help you see exactly how much you will owe in taxes next year.

My extra $30 per paycheck is going straight into a savings account. This way, I get to keep the interest myself and will have the money available to pay the taxes next April. How many people are going to be surprised to find they owe thousands in taxes next year because this isn’t a tax cut?

This is not last year’s stimulus divided up over the year instead of a lump sum. Harley Pebley is absolutely correct. All they changed is the withholding tables. They didn’t change the tax rates. They are letting you keep a little more of your money now, and you may end up having to give it back at tax time.

I’m under a 15% paycut, spending A LOT less than before. Very frustrated. H/R actually sent out an email about increasing your investment in your 401K – I changed my contribution to 0% when we got the pay cut.

So I just about cried when the increase came. It’s only $32/month take home for me.

As much as like to just absorb and use it, then it’s gonna hurt when it goes away, so I’ve set up an automatic transfer to my savings to save it. I need more savings, so that’s a good thing for me, and when it ends, I’ll just cancel the transfer.

Very interesting material Kevin. I find that I view this very differently based on which economic hat I’m wearing – my micro hat or my macro hat.

I’m a firm believer in the accountability of the individual so I’ll start mirco… in this vision I can allow myself to view this new plan as sinister, as if they are trying to trick me. But I also have to agree that it’s ‘extra money’ (my money really) and that I am accountable for how I treat it. In this world I’m pleased that I run a zero-based budget so I’ll surely notice the extra dollars and will react accordingly – hello flakes for the ball!

On a macro level… where the economy is nothing more than an engine we must tinker with to keep running… as a government economist I’m less concerned with the efficiency of the running so long as it’s running but that’s another topic altogether.

In my tinkering I recognize that I simply need to inject more dollars into pipeline – or grist for the mill – and the best way to do that (as any baker will tell you) is to mix it in slowly. For the masses not paying attention there’s no reason to wake them with a check they must make a decision over when you can simply release a few funds they won’t notice but which might have a larger downstream impact.

I’m not a proponent of stimulus plans anyways, but at least this time they have the presentation correct. Those paying attention will save or debt reduce in either model but those not paying attention won’t either blow the money on one silly purchase or find religion and save the money themselves. Rather… they’ll live their sleepwalking lives and burn the dollars a little at a time in the course of their lives.

This approach will then do 2 things… have a more sustained impact on the economy AND prove that there’s something to this lower taxes idea.

Hey, great stuff as always Kevin and congrats on the “big dawg” guest post… promise to remember us little guys!

I recently changed my IRA contribution from 5% to 10% and I was thinking about changing it to 15% which is my limit. I will probably do that because of the extra money. I just paid my house off, so I already have the “breathing space” to do that.

Our grocery bill has gone up on avg about $100 per month this year as we’ve shifted from a diet of primarily prepackaged/processed foods to buying from local & organic producers/farmers markets wherever possible & supplementing with some items from Trader Joe’s & Whole Foods.

The extra $50 each for my husband & I will leave us some room in our budget to continue spending on this food that has made us feel so much healthier and energized. Without the stimulus, we would have to cut back right now on something else in the budget to offset. I like the idea of my stimulus $$ out there helping to support my local economy.

To comment on the whole government stimulus/they-shouldn’t-tax-so-much discussion, I think it is interesting that income tax is pretty much taken for granted in our country despite its relatively recent pedigree.

It does seem necessary since we do expect government to do so much for us (Social Security, justice system, military, etc.), but there is certainly an argument for saying that there simply isn’t a good thing. I don’t know, I can kind of see it both ways.

Has anyone read or read about the book “Nudge”? I think that this idea is, at least, very similar to ones it discusses. One of the authors is a current advisor to the President and was also one during the campaign. Both are University of Chicago professors who research how to “Nudge” people to make decisions that are thought to improve health, wealth or overall well being. The website is http://www.nudges.org/index.cfm

We didn’t quality for any stimulus check earlier. I noticed an extra $10 in my paycheck this morning though. By this afternoon my automatic investment in my personal bond fund was increased. I’ve done this for years: every time I get an increase in pay, I put some or all of it in savings/investments. ..guess that’s why I didn’t qualify for that stimulus check. :`)

Meh. Patriotism is the refuge of the scoundrel. The rest of the country did its level best to try to screw me over in the last 2 decades by ruining the economy, so why should I help them out now by trying to ‘fix’ it?

Let’s see. Cheaper goods. Cheaper travel. Increased wages for me. Recession proof job. Recession proof real estate market in my town. So far I am not seeing any downside to this recession. I’ll save mine just to spite the bankers. In fact, I think I’ll save it in a jar under my mattress, just so I know its doing the least it can to stimulate the economy.

My last stimulus check helped for me to afford a trip to Argentina. This time around the money will likely end up in a savings account to be spent at a later date. I don’t have any direct plans of spending it on anything in particular. It would be nice if we were able to get a lump sum payment so that it wouldn’t simply slip through our fingers, but that is the plan…those evil government people… ;-)

Sorry to disappoint the lawmakers, but I can’t be tricked into spending more by the old “a few extra bucks in the paycheck” trick. I have my bi-weekly pay direct deposited into my savings account. I have a monthly spending plan, and each month I transfer the planned amount to my checking. Anything that is not part of the plan requires a conscious decision and an additional transfer from savings. So if my paycheck is increased by a few bucks, all that will happen is my savings balance will increase a bit faster – unless I actually decide to spend more.

I don’t plan to do anything with the money. I intend to adjust my withholding allowances to put the amount back to where it was, because I sure don’t see much possibility of my taxes going down.

Right now I set my allowances so that I come as close to breaking even as I can. Why give the government an interest free loan for a year, which is all a refund is? If they take less out of my paycheck, I’ll just get hit with a big tax bill next spring.

Oh yea, 401ks? Those things that we have to auto-force people to invest in otherwise they wouldn’t use them at all? I can definitely see how MPC would vary across income groups — lower income is much more likely to spend their dollars rather than the rich person who doesn’t need that extra dollar to pay for rent, etc.

Interesting comments all around. GRS readers are a smart bunch — sounds like most of you will be diligently saving it. I need to look into the claim that it will be owed back in April 2010 — I hadn’t heard that.

I noticed a bump in my pay this month, but just socked away the extra money along with my usual monthly savings. I have no plans to adjust my spending upward because of the bump: I’ve already budgeted my spending for the next several months, including discretionary funds for a couple of trips and a couple of material goods. But I was planning on those things anyway.

As others have said, I’m very uncomfortable with the idea of “spending our way” out of the recession. Aren’t those habits partly what got us in this mess in the first place? I’d much rather that we collectively use the recession as an opportunity to make our culture more frugal and “green.” But even with the recession in progress, I haven’t seen fundamental change in the country’s habits. Even in hard times, the earn-and-spend treadmill is running pretty strong. As the recession ends, it will be business as usual.

I don’t see it as my patriotic duty to spend money; rather I think it’s more patriotic to build personal financial security. If Americans are financially secure as individuals, the nation will be financially secure as a whole.

Not sure this affects us unemployed people, but either way most of the money I’ll be spending will be on my vacation European vacation this month, not locally. (And for anyone wondering, no this trip won’t put a large dent in my finances.)

Since I haven’t really cut my spending in the past year, I see no reason to artificially increase it now. As a matter of fact, given the current home improvements I’ve put in place and spent money on, I’m thinking I’ve done my share of stimulation for this year and next. I’m taking a portion of the increase and adding it to the college savings. The rest is going into savings for future spending on home projects (I’ve still got a basement to finish).

I did notice an extra $25/wk in my husband’s unemployment check. I have spent some this month on our gardening needs and then allocated the remaining dollars to pay down debt. Next month I will probably use a little for the boys clothing needs.
Basically it is just giving us a little wiggle room in our currently very tight budget.

@Nick: I don’t recall ever saying I was fine with the trillions of dollars we are spending to bail out banks, etc.

I do recall that last year (before we spent billions of dollars) that there was quite the uproar about the stupidity of printing a letter and mailing it out to let people know checks were coming, when the media had covered it over and over and over.

Just because we’ve spent billions/trillions on the bailout doesn’t mean we should spend millions on unnecessary printing costs.

I struggle with this notion of “stimulating the economy”. I want a healthy economy, yes. But I think we need and are heading toward a NEW economy and it’s somewhat inevitable since we’re culturally moving toward (I hope) less consumerism and more like spending in line with personal values and desires (not artificially created by advertising). This new economy includes not just the exchange of money, but also the exchange of time and talents (good old fashioned bartering) that cuts out the corporate middlepersons.

Sooo, what I’m getting at is what is the “new economy” and does THAT need stimulating? In other words, do we spend our money keeping something on life support, or let it die its death and put our energy, time, money, and intelligence into the new baby?

We spent last year’s checks on debt reduction/prevention. This extra bit we will begin receiving in our paychecks will go toward the debt, and then all money currently going toward debt we will split between extra payment on mortgage, home repairs that will save us energy/money (our windows SUCK), and into savings/retirement. So it will get absorbed all right, but into our pockets, in anticipation of using it consciously.

Odd coincidence- since the stock price of my employer has tanked (down 75% from ’07 peak at one point) but has good long term potential, I signed up for the stock reinvestment plan for an amount that will pretty much equal my equal my stimulus increase.

My change in take home pay? A wash.

Not what the folks in charge intended, and not what I planned, but I have no doubt I can afford it now.

I won’t be shopping to stimulate the economy, although I am more aware than ever about supporting local businesses with my day-to-day purchases. However, I *have* upped my monthly giving to charity. I’m putting money in the economy that way, hopefully helping to save some jobs, reducing my taxable income, and feeling good without adding more *STUFF* to my home.

I was with Egaas, in fact I (coincidentally) timed it perfectly that the same paycheck that my witholding decreased was the same one where my 401(k) contribution increased. Net tangible result: $2/week more to savings.

I am surprised at all the people who are angry about the government ‘seizing’ or ‘stealing’ their money.

Sure, you can look at some things the government does and say “I didn’t want to spend my tax dollars on that!” but in fact, your tax dollars are being spent to try to help you personally out in a number of ways, and you also get to vote and have a say in who makes those decisions etc. It’s a democracy, not a totalitarian regime. And I’m just thankful that we have a government and taxes so I can have my highways, and schools, and social supports. I don’t consider my taxes to be stolen or seized from me. I am politically active and I willingly pay my taxes to keep this country in working order because I like living here. I could always go live out in the wilderness somewhere and not pay taxes and get to hoard all my money to myself and only spend it on things that benefit me personally in my little cabin in the woods, but I suspect it would be much less satisfying.

I did my part to stimulate the economy last summer. When I got my stimulus check, I went to the bank and exchanged it for $600 in cash. Then I used that money to buy things from local stores. A new bike accounted for most of the money, but I also got some sweet chaco sandals and a couple other things I had been wanting.

This money will go towards everyday living: food, gas, utilities, daughters’ college, mortgage. My husband’s job was reduced to 4 days per week last month. Mine took a 10% salary cut in November, and starting in March, a week furlough out of every month – works out to about 30% cut for me. I had to reduce my 401K to help make ends meet and it’s killing me because this is the best time to invest. I’m looking for a second job, but we’ve got over 10% unemployment in this state – part time work is hard to come by.

My husband and I try to do a bit of both — spending more locally, as well as socking some more away in savings. We already save almost $1k a month, some towards “general savings”, some toward retirement, kids’ college fund, etc. But we also put a fair bit into our “dates & meals” fund, and things like that, with which we try to consciously spend on worthwhile, locally produced food and products. As soon as I realized that our pay amount had changed, we had a little budget meeting, and decided not to make any changes to the budget. It just makes for a bigger unallocated amount at the bottom of the budget spreadsheet, so that if we have some unexpected expenditures, we have a little more each month to cover it, and if nothing comes up, it gets moved over to savings.

Can someone provide me a link showing that this stimulus will need to be paid back?

No link needed. This isn’t a stimulus where they’re giving you money. This is simply reducing the prepayment on the taxes you owe. The amount owed in the end is the same, you’ve just paid less up front to cover it.

If you’re not already overwithholding, then you will end up owing at the end. I think they are assuming most people overwithhold and this is basically doling out next year’s refunds early.

Harley, I’d still like to see a link. When I look at the Recovery page, the payroll adjustment is listed as ‘Tax relief’ and ‘tax credit’. Nothing in it leads me to believe that this is different than last year’s stimulus check. Where did you get your information? I’d like to adjust my withholding if necessary. Thx!

Misconception #2: The adjustment to withholding will have to be paid back when you file your tax return next year.

Wrong — the stimulus is actually a tax credit of 6.2% of taxable wages in 2009 and 2010, to a maximum each year of $400 for single taxpayers and $800 for married couples filing jointly. The credit is refundable, which means that you can still receive the full credit even if it is worth more than your total tax liability.

Paychecks are being adjusted now to get more money into the economy faster. You’ll claim the credit when you file your return next year, so your tax bill should adjust in line with the stimulus money (and you might get some extra money at tax time if your withholding wasn’t adjusted enough to account for the extra credit during the year, which may happen for some married people in single-earner households).

I have decided that my personal economy is most important at this time. I am spending less and I am being more conscious of what I do spend. I try to support local business whenever possible, and avoid mass retailers. I utilize Freecycle as much as I can. Besides, if understand this whole stimulus thing correctly, they are not really giving the money to us, it’s more like a “loan” that is repaid with next year’s taxes??? So we have a little more money this year, but less next year? I am not sure how this helps. Maybe I am not clear on this.

I no longer receive a paycheck (quit my job in January and I’m living off of savings and working on getting self-employment going), but if I received such a stimulus increase, it would definitely go to savings.

The reason is because I pay myself last, which is an excellent strategy for maximizing your savings, as I wrote about on my blog recently. It works like this: I get my paycheck, I take out a fixed amount for rent, bills, debt payments, and general recurring expenses which are either fixed or fluctuate only slightly. Then I take out a fixed amount for day-to-day living expenses and entertainment and the “unpredictable” expenses. Everything that’s left over — including extra money from the stimulus, or a recent raise, or overtime, or whatever — goes into savings. All my money is earmarked by the end of payday, and savings is earmarked LAST for greatest value.

Paying myself last ensures that I’m saving as much as I can afford to without damaging my lifestyle (rather than picking an arbitrary amount and saving it even if I can afford more on a given paycheck), and it’s why, were I still working, my stimulus increase would go completely toward savings.

The personal savings rate is basically your year-end cashflow. If you make 10,000, and have 1,000 in the bank at the end of the month, your PSR is 10%. (to put it simply). The PSR is often a highly misused statistic, because it only measures the percent of what you don’t consume. Buying bonds, stocks, a 401k, a house, is all considered consumption by this statistic. It’s a BAD statistic to use!

To all:

As far as saving money and stimulating the economy, there is a trade-off. Think of the all the savings rates that are possible (0-100%, for rationality’s sake). For some segment of those rates, as the savings rate increases, the economy grows and grows at an increasing rate. At some point, there is a plateau, and then further saving decreases economic growth at an increasing rate. Like most things, moderation is key.

And again, the PSR is a terrible statistic to use. I wish BLS didn’t report it, because the name implies something that it isn’t.

@Lakita
“Can our nation evolve over time to make saving a priority and spend only what we can afford?

Are there â€œnegativeâ€ side effects to this type of society?”

Yes, there are negative side effects to a society where everyone saves “too much.” It is the paradox of thrift–it’s good for an individual if he or she saves, for all of the reasons that people save money. However, if the entire economy saves at a high rate, then investment by firms will fall (i.e. they won’t build up inventory because you won’t buy it). We’ll have lower consumption, lower investment, and hence lower GDP. See Japan’s lost decade–excessive savings is by no means the only reason for it, but is a major cause. It is an interesting exercise to think what would happen if Americans had Japanese (I think 20% or so) savings rates–who would we lend (in the form of savings accounts/stocks/bond) to? They were only able to sustain their high rates because we were borrowing. If we lend, who borrows, and at what rate?

Additionally, one could argue that to keep city/state government spending (the bulk of, say, school budgets), property and sales taxes would have to increase.

$50 a month is an insulting joke. No one will notice the difference. Why can’t the tax payers get a real bailout like big business? I don’t know the exact numbers, but I recall reading that with all the bailout money spent so far, every US citizen could have received $75,000, or every US family around $300,000. Now, tell me a check of that size wouldn’t get spending back into the economy like a wildfire. (Of course, then we’d have an inflation problem, and I mean a more immediate inflation problem than the inevitable one we’re facing anyway.)

When I ran this through, the exact amount that I will owe in taxes next year works out to be $30 per paycheck, or, the exact amount of taxes that is no longer being withheld from my paycheck. This calculator is an extremely valuable tool that I feel too few people know about. It helps you know exactly how much to have held from each paycheck so you don’t over or underpay.

My decision is to keep that ‘stimulus’ money and put it into a savings account so it will be ready for taxes next year but I will get to keep the interest. If I’m wrong and it doesn’t have to go back, then I’ll get a nice chunk of change out of savings and go buy something nice;)

When I saw that we would be getting about $40 more dollars a month, I did something I have wanted to do for some time. I opened an online stock purchasing account and started buying stock–dollar cost averaging style. It is huge thrill to see my decisions pay off with a sum of money so tiny I probably won’t shed too many tears over. If I have to give it back in next year’s taxes, it will have probably made me more money than a standard savings account. At least I hope it will…

I’m stimulating my employer’s economy by having $480 a month docked from my paycheck in biweekly furloughs. I suppose in the sense that the $50 (or whatever the amount really is–I sure haven’t seen a fifty-dollar increase!) will help buy groceries, sure, it’ll get spent.

The furloughs are conveniently cutting the amount that goes into my 403(b), too, so if we believe that saving is unpatriotic and not saving stimulates the economy, my coworkers and I must be stimulating as the dickens.

The extra money in your paychecks (decreased tax withholding) should equal the new “Making Work Pay” tax credit.

Therefore, just multiply the addition to your paychecks by the number of paychecks you will receive in that new amount during the year. Then, compare that to your expected tax credit.

If you’re paid weekly and have received 15 checks this year, you’d have 37 paychecks remaining through year end. If your very last check had the new withholding, that would mean that by year end, 38 checks will have reflected the new withholding rates.

For example, if your check went up $9, then $9 x 38 = $342. This would be less than the new $400 credit, and would cause you to receive a greater refund next year.

From IRS.gov:

“In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.”

“This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.”

I noticed the extra 20 dollars per paycheck and began transferring an additional 20 dollars to savings each payday. I didn’t need it before, I don’t need it now. I am doing plenty to stimulate the economy with my regular paycheck as I never altered my spending patterns with the recession.

Of course, if my pay is reduced or I’m laid off I’ll definitely alter my spending patterns to only the minimum needed.

I just now spent my stimulus check from last year — I bought myself a new mountain bike (fitness plus fun!). In talking with the salesman, he said they have a pretty recession-proof business, as most people coming in to do bikes are using it to either reduce gas costs or get in better shape for cheaper than a gym membership.

I know I’m so far behind that my comment will likely not be read by those in the argument, but the government does earn the money through giving us all roads, bridges, schools, libraries, police, firefighters, armies, and more. What is better: to pay taxes and get many services provided for free, or to pay a fee every time you want to step on the sidewalk? Would we want to watch our house burn down because the firefighters couldn’t accept our credit card?

@Leah:
The services you cite are primarily funded by state and local taxes — not federal tax money. When you state these categories so plainly, they are valid enough, as these are some of the things our government should be responsible for because pooling resources is best for us as a whole (think if we each had to build our own part of the road, etc.). However, there are MANY projects funded through taxes that are a COMPLETE waste, not to mention all the inefficiencies of having the government in control of others.

As far as I know, that’s exactly the case. People will either get a smaller refund or owe more. If this sort of thing isn’t illegal already, it should be made so. I’m diverting my excess into higher payments on my credit card, trying to get it to zero again. I got it down last year, then expen$ive things happened to the car. I’m trying to get back into reading GRS, I also owe J.D. two or three articles that I’ve never finished.

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My name is J.D. Roth. I started Get Rich Slowly in 2006 to document my personal journey as I dug out of debt. Then I shared while I learned to save and invest. Twelve years later, I've managed to reach early retirement! I'm here to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you get rich slowly. Read more.

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